Monday, May 9, 2016

The prices of oral cancer drugs are rising. This will come as no surprise to anyone who has cancer or who knows someone who has it.

Why did these prices increase at this pace? My visceral reaction, which I suspect is the same as yours, is to rail against "corporate greed," something we have seen on display for even old drugs to a spectacular extent lately.

But here is my guess. The combination of rising consumer income (even with the recession) and the spread of drug insurance meant that the maximum amount consumers or their insurers were willing to pay for these effective drugs for desperate situations grew. It was growth in demand or consumer value that persuaded drug firms to develop drugs that would be profitable if introduced at higher prices.

If we consumers want to do something about rising prices for cancer drugs, we need (according to the hard-hearted economist) to do what happens when prices for gas, or steak, or designer ties is rising — we need to walk away from them. A tepid demand response will itself temper prices as well as total spending, and perhaps offer a cautionary lesson for future health care price increases.

Drug prices are out of control. Wharton School's Mark V. Pauly, PhD, of "moral hazard" fame, suggests that we, as consumers, can do something about it. We simply walk away from the high-priced drugs we need and then the markets will take care of the prices.

That might satisfy "the hard-hearted economist," but there are other economic tools that can be used to achieve our objective: ensuring that everyone receives all essential health care services and products. Predominant amongst the alternative methods of health care financing would be single payer Medicare for all.

A publicly-financed system with government administered pricing and first dollar coverage is much more effective than markets in ensuring both appropriate pricing and access. Using the market tool of walking away eliminates access. That might be fine for designer ties, but it isn't for health care.